Molycorp Inc.’s board was sued on the company’s behalf over claims that it misled investors about the rare-earth market, creating a “price bubble” for the shares.

Molycorp’s directors and its controlling shareholders Resource Capital Funds and Pegasus Capital Advisors devised a scheme to temporarily inflate the stock’s value and then profit by dumping more than $1 billion of their personal holdings into the market in February, March and June of last year, according to the complaint. The lawsuit, which was made public today, was filed by Arizona resident Ira Gaines, a trustee of Paradise Wire & Cable Defined Benefit Plan.

Directors falsely implied that Greenwood Village, Colorado-based Molycorp could meet increasing worldwide demand of critical rare earth elements, Gaines said in the complaint. Directors also omitted that mining experts predict the light rare earth elements the company may be able to produce this year will be in oversupply in the next several years, fetching lower prices, according to the complaint.

Company insiders, including current board members and a controlling group of shareholders, netted $1.6 billion in secondary offerings, months before concerns arose about declines in rare-earth prices and delays in construction at the company’s Mountain Pass mine, Gaines said in the complaint.

13 Percent Stake

The share sales and the company’s subsequent agreement to sell a 13 percent stake to Molibdenos & Metales SA has diluted legacy shareholders, Gaines said. He is seeking to recover damages on behalf of the company for breach of fiduciary duty, corporate waste and unjust enrichment, according to the complaint.

Jim Sims, a spokesman for Molycorp, declined to comment immediately when reached by phone.